Unit 7aEconomics

American Free Market System

Introduction

Challenges in a free market

Supply and Demand

Economic systems

The U.S. economy

Factors of Production

Business organizations

The Circular flow of Economics

Resources, goods and services and money flow continuously among households, businesses and the government in the U.S. economy.

The Circular flow of Economics Continued…

Individual households own the resources used in production; sell the resources and use the income to purchase products.

Businesses (producers) buy resources used in production; sell the resources and use the income to purchase products. Businesses provide households with income and goods and services.

Governments use tax revenue from individuals and businesses to provide public goods and services.

Households

supply

businesses with

labor

(workforce) and

payments for

goods and

services

Businesses

provide

households

with income

and goods

and services.

The government

supplies

businesses with

public goods and

services and

payments for

products

purchased.

Businesses provide the

government with taxes and

goods and services.

The government provides

households with income and public

goods and services.

Households

provide the

government

with labor

(workforce)

and taxes

Production, Consumption and Distribution

Four Questions all Economic Systems must Address

Four Questions All Economic Systems must address…

What is produced?*Production*

Goods and services must satisfy the consumers wants and desires

Four Questions All Economic Systems must address…

HOW should these goods be produced?

*Factors of Production*1. Capital

2. Entrepreneurship

3. Land

4. LaborCombine the factors of production to make or produce the goods and services

Four Questions All Economic Systems must address…

For WHOM are the goods and services produced?*Distribution*

Getting the goods and services from producer to consumer

Four Questions All Economic Systems must address…

HOW MANY goods and services should be produced?*Consumption*

Make enough to have a large profit and still have consumer demand. How many is determined by supply and demand.

Supply and Demand

Supply and Demand…

Scarcity is the inability to satisfy all wants at the same time due to limited resources

Choices must be made as to what to produce, how much to produce and who will receive what is produced.

PRICE: Mechanism to decide who gets goods and services. The amount that satisfies both producers for profit and consumers for value.

Scarcity

Choices

Price

Supply and Demand determine price through their interaction

DEMAND: is the amount of a good or service that consumers are willing and able to buy at a certain price

SUPPLY: is the amount of a good or service that producers are willing and able to sell at a certain price.

LAW OF SUPPLY :Businesses will provide more products

when they can sell them at higher prices

LAW OF DEMAND:Buyers will demand more products

when they can buy them at lower prices

Incentives

Incite or motivate Change economic behavior Something that spurs someone into

action: sale, coupons, etc.

Resources, Scarcity & Opportunity Cost

Good

Anything that can be grown or manufactured (made) Food Clothes Cars

Service

Something a person does for someone else in exchange for money or value.

Doctor Hairdresser waiter

Resources

Natural

Human

Capital

Combine to make goods and services

Our Basic Economic Problem…

People have Unlimited Wants

Food

Clothing

Shelter

Schools

Hospitals

Cars

Transportation

But Resources are Limited

Land

Soil

Minerals

Fuels

People

Money

Technology

Scarcity

The inability to satisfy all wants at the same time; the NEEDS are greater than the RESOURCES

Since resources are LIMITED consumers and producers must make CHOICES

CHOICE: selecting from a set of alternatives

OPPORTUNITY COST: what is given up when the choice is made.

*Scarcity forces us to choose which needs and wants to satisfy with available resources.

*Scarcity affects decisions concerning what and how much to produce, how goods and services will be produced and who will get what is produced

Production: (sellers)

*Combining resources to

make goods and

services.

*Available resources and

consumer preference

determine what is

produced

Consumption (buyers)

*Using goods and

services

*Consumer preference

and price determine

what is purchased

SELLER Buyer

Challenges in a Free Market: Terms

Scarcity

In English

You can't have everything

you want.

Lessons for life

Acceptance of scarcity will

help you make more

reasoned choices

Alternatives

In English

Different options from which you can choose

Lessons for Life

There are many different ways to allocate resources and to solve

problems

Yes….these are generic converse!

Choice

In English

Because you can't have everything you want, you have to make choices from a list of

alternatives

Lessons for life

When policy-makers decide on

a particular resource

allocation, recognize that a

choice had to be made due

to scarcity. You may not like

the alternative chosen, you

may question the choice, but

the villain is scarcity

Trade-off’s

In English

Choices involve giving up something to get something. All choices have consequences, both positive and negative

Lessons for Life

You are responsible for the consequences of your choices. Since you make choices, you can't be a victim.

Opportunity Cost

In English

What is given up when a choice is made

Lessons for Life

All choices have opportunity costs. A good idea is only a good idea if its value is greater than the value of its opportunity cost. Voters must always identify the opportunity cost of a particular policy

Economic Systems

Command Economy

The central government makes decisions and determines how resources will be used.

The central government owns property and resources.

Businesses are not run for profit.

Businesses are not run for profit.

No competition

Lack of consumer choice

The government sets the prices of goods and services.

China, North Korea, Cuba

Mixed Economy

Most common type of economic system Government and individuals share the decision

making process Individuals and businesses make decisions for

the private sector Individuals own the means of production Government makes plans for the public sector

Government guides and regulates production of goods and services offered.

A greater government role than in a free market economy

Most effective economy for providing goods and services

U.S. and most Western European countries are mixed economies

Free Market Economy

Also known as capitalism or free enterprise Private ownership of property and resources

(owned by individuals) Individuals and businesses make profits Individuals and businesses compete

Economic decisions are made by supply and demand

Profit is a motivator for productivity No government involvement Consumer sovereignty: buyers determine

what is produced

The U.S. economy is

a MIXED

ECONOMYPRIVATE

PROPERTY

FREE

MARKETS

PROFIT

COMPETITION

CONSUMER

SOVEREIGNTY

Markets are

allowed to operate

without undue

interference from

the government.

Money, goods and

services flow

continuously

among individual

households,

businesses and

the government

Consumers

determine

what goods

and

services are

produced

by what

they buy

Money left

over after

all business

expenses

have been

paid.

Rivalry

between

businesses

for the

same

customers;

results in

better

quality Individuals can

own the means

of production &

property without

undue

government

interference

Factors of Production

anything that goes into the making of a good or service

Factors of Production

Capital

Ex: tools, machinery, money and technology

Entrepreneur

Business owner and risk

taker combines the

factors of production

Factors of production cont…

Land

Natural Resources

Labor

Workers and their time and energy

Business Organizations

The 15 million businesses in the U.S. fall into three categories: sole proprietorships, owned by a single individual,

partnerships, with more than one owner sharing the risks and profits and corporations, owned by their stockholders.

Sole Proprietorship

1 owner

The owner takes all the risks Supplies capital, hires help, pays taxes The owner makes all the profits The owner is solely responsible for losses

Partnership

More than one owner (2+)

Risks are shared amongst the owners Profits are shared amongst the owners Often more successful than sole proprietorships Responsibilities are shared

Corporation

Owned by stockholders

Authorized to act as a legal person regardless of the number of owners Owners share the profits Liability is limited to investment (you can only loose as much as you put in) Raise money by selling stocks No one is responsible for corporation’s debt if it fails